Question

Why are adjusting entries important?

Your answer should be 100+ words

Answer 1

Adjusting journal entries are accounting entries made to a company’s journal of accounts at the end of a financial period. The process allocates income and expenses to the actual period in which the income or expense occurred.

This is done under revenue recognition principles in accrual basis accounting, as opposed to the time payment was received or made under cash basis accounting.

the adjusting entries are needed so that a company's:

1.Income statement reports the revenues that have been earned during the accounting period

2.Balance sheet reports the receivables that it has a right to receive as of the end of the accounting period

3.Income statement reports the expenses and losses that were incurred during the accounting period

4.Balance sheet reports the liabilities it has incurred as of the end of the accounting period

examples of adjusting entries

• A company shipped goods on credit, but the company's sales invoice was not processed as of the end of the accounting period
• A company received some goods from a vendor but the vendor's invoice had not been processed by the company as of the end of the accounting period

5.Adjusting entries are also used to correct errors, and must be completed before a company’s financial statements can be issued

examples of adjusting entries necessity to correct errors

• An entry has been made in the company’s accounting records, but the amount needs to be moved to the period in which the expense is incurred or the revenue is earned or divided up between two or more accounting periods
• Something is booked to a capital account like Fixed Assets that, under company policy, should be booked to an expense account like Supplies Expense, or vice versa